RETIRED Judge Willem Heath’s Review Report of the Proceedings and Findings of the PIC Commission of Inquiry, reveals a scathing rebuttal of the Mpati Report findings on the valuation of AYO Technology Solutions, criticising the Commission for relying on one former executive’s evidence.
In the report, Heath highlighted that the Mpati Commission further noted that: “the valuation of AYO was based on a forward price-earnings multiple (PE) of 16 times based on AYO’s estimated normalised earnings,” and that, “the premium paid by the PIC (Public Investment Corporation) represents the additional value in the listed space and was based on the present value of future cash flows based on growth opportunities identified.”
However, as Heath emphasises, when considering the statements and testimony of the PIC’s employees involved in this deal, a different picture emerges.
According to the submission to the Commission by Sunil Varghese, PIC’s portfolio manager of non-consumer industrials and listed equities, the normalised P/E valuation gave a base case value of R43 per share.
Furthermore, the PIC conducted a discounted cash flow as a backup which indicated a fair value of R45.29 per share. The PIC also used the EV/Ebitda model, which indicated a fair value of R47 per share.
Heath also noted that another PIC employee, Lebogang Molebatsi, the general manager of Listed Equity, said in his submission to the Commission that their approach to the AYO valuation was to use a normalised P/E methodology, which would enable the PIC to use, “peer analysis of key inputs, such as, the median price to earnings and nett margins as a guide to derive a value for AYO”.
Molebatsi also states that “these forecasts were independently reviewed, and an opinion expressed thereon by a reputable audit and accounting Firm”.
Independent Media reported in 2019 that Varghese also told the Mpati Commission that EV/Ebitda was a popular valuation multiple used in the finance industry to measure the value of a company.
He said it was the most widely used valuation multiple based on enterprise value and often used in conjunction with, or as an alternative to, the P/E ratio to determine the fair market value of a company.
Varghese said the key assumption was that the fundamental or fair value was discoverable using the tools: discounted cash flow (DCF), internal rate of return (IRR), exit P/E, price to book and EV/Ebitda.
Varghese also testified that the PIC assistant portfolio manager, Victor Seanie, was very familiar with the normalised P/E valuation methodology, and it was his preferred approach when he valued companies.
“We also did a DCF valuation as a backup, but this was not annexed to the PMC submission of December 20, 2017.”
Varghese said the AYO valuation was based on the premise that the PIC expected it to win market share in the information technology (IT) and related services industry due to its superior black economic empowerment (BEE) credentials.
Based on the forecast revenues presented in the PLS, and approved by the JSE, AYO would have a modest market share of 3.4 percent in 2019.
“We then used these forecasts and peer group analysis to determine a normalised price to earnings valuation. In order to calculate a normalised earnings number, one would project earnings forward to a normalised level, three years in the case of AYO, since the first two-year period has substantial acquisitions and then discount it back to current levels,” said Varghese.
Earlier, the Financial Sector Conduct Authority (FSCA) had submitted to the Commission that it had never received any irregularity report about the PIC’s investment into AYO.
The FSCA’s divisional executive for licensing and the business centre, Felicity Mabaso, said the authority was informed that there were no mandate breaches in what is now known as the ’AYO transaction’.
Heath’s report effectively found that in the case of AYO, there was no involvement, according to all the affidavits from September through to December, in the valuation of AYO by either Iqbal Survé, or then PIC chief executive, Dr Dan Matjila.
AYO falls under businessman Survé’s Sekunjalo stable of companies.
“There is no evidence that Survé was involved in either the pre-listing statements or valuations of AYO.”
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